The Craft Of Investing


"The best book in the investment field I've read in years."

-- Paul Erdman, New York Times Book Review

"The best...The book is eminently sensible and a pleasure to read."

-- Kiplinger's

John Train founded Train, Babcock Advisors and is chairman of Montrose Advisors, both of New York. His best selling books on investing include The Money Masters, Money Masters of Our Time and ...

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"The best book in the investment field I've read in years."

-- Paul Erdman, New York Times Book Review

"The best...The book is eminently sensible and a pleasure to read."

-- Kiplinger's

John Train founded Train, Babcock Advisors and is chairman of Montrose Advisors, both of New York. His best selling books on investing include The Money Masters, Money Masters of Our Time and The Midas Touch. He has written several hundred columns for The Wall Street Journal, Forbes, The New York Times, Harvard Magazine, The Financial Times, and other publications. He has received appointments from three presidents, and is a director of several emerging market mutual funds. He lives in New York, spends summers in Maine, and travels frequently to Europe, Asia and South America.

Providing proven and practical advice on successful investing, one of America's most respected investment writers and practitioners has written the ultimate treatise on how to invest well. Train outlines the key strategies and the principles that have brought him success. Charts & graphs.

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Editorial Reviews

Library Journal
As Train says, bad books on investing make it sound easy. This is not a bad book. Train (The New Money Masters, HarperCollins, 1990) explains that stock investing requires being thorough, tough-minded, and flexible. He covers different investment styles, market cycles, when to buy and sell, managing a portfolio, and even handling estate matters, all from his own unique experiences as investor and investment consultant. Some of the recommendations may be beyond the average investor (such as having one reliable local source of information in a foreign country), as may some of the analysis-e.g., "doing a spreadsheet for each company you own." But in general the work is accessible, realistic, and filled with amusing snippets. You can make something of yourself, argues Train, "if you are always honest, energetic, and careful." May it be so. Recommended.-Alex Wenner, Indiana Univ. Libs., Bloomington
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Product Details

  • ISBN-13: 9780595472123
  • Publisher: iUniverse, Incorporated
  • Publication date: 12/19/2007
  • Pages: 228
  • Product dimensions: 6.00 (w) x 9.00 (h) x 0.52 (d)

Read an Excerpt

Chapter One

The Craft of the Specific

Everyone needs to preserve savings for future use; that is, to invest. There are two ways: by owning assets with reasonably predictable earnings, such as company shares or real estate; or else by lending the money, such as by depositing it in a bank or buying a bond. Stocks offer a much higher return over long periods than bank deposits or bonds, and smaller companies a higher return than very large companies. (Speculating is buying something with an unpredictable return but which you hope will "go up.") In this book I talk principally about owning assets represented by marketable securities: that is, investing in stocks.

There are two basic techniques that I believe most investors can follow with a good hope of success, and which are the subjects of later chapters.

First, buy growth stocks during market washouts and hold them until their growth slows.

Alternatively, buy conventional companies when they are selling extremely cheaply in the market, and sell them again when they have recovered.

To follow either of these techniques requires common sense and a feeling for the world, together with a certain amount of analytical ability. (There are also always new techniques, some of which I win touch on later, but which are much harder to execute.) While an investment professional must know a great many things, it is sufficient for the private investor to know just a few. One good buy a year, or even every few years, is enough so that you will prosper mightily.

Your investment oddsimprove, and your risk declines correspondingly, to the extent that you know more than the market does about a stock you are buying. You can do that either through superior knowledge of something specific, like a shopper who spots a bargain, or by recognizing that a whole class of stocks, such as Mexican companies in the 1980s (which have since risen dozens of times in dollar terms), is too far out of favor and buying a package of them. The general rule is this: Investment opportunity is the difference between the reality and the perception. Thus, all good investors are contrarians. Any publicly traded market will swing wildly back and forth between euphoria and despair. So if you can get the facts right, buying good value that is out of vogue will do very well for you.

Investment, as distinct from speculation, is the craft of the specific. It's extraordinary how much time the public spends on the unknowable. Is the market going up or down? Is the economy recovering? What is the government going to do? In military matters, it is notorious that armchair tacticians talk about grand strategy, while professionals talk about supply. The most elegant strategy will fail if the army runs ou of food, fuel, or ammunition. Similarly, large conceptions are cheap in the investment business. What you really need to know is whether company A is superior to company B, and whether their prices reflect that difference.

When one does not know the values, one starts guessing vaguely how a stock is likely to move in the short term, which is unknowable and not even useful. The long term is important and also easy: as a company's earnings and intrinsic value rise over the years, its stock will infallibly follow. Admittedly, short-term movements are interesting. You see tables showing that if you could have caught interim highs and lows you would have done much better than the averages. Sure! But that sort of movement — Brownian motion, practically — is virtually unpredictable, and expensive to try to take advantage of because of high transactional costs.

And consider this: The total return from owning U.S. stocks for very long periods has been about 91/2 to 10 percent, market crashes included. However the greatest moments are usually the violent rebounds from a bottom. But market timers are usually out of stocks at a bottom, and if you miss the best month or so in each decade, you cut your return by about half!

Furthermore, if, like a tape watcher in the old days, you spend your time worrying about short-term market jiggles, you will deflect your attention from what can make you rich: how well your companies are doing.

To sum up, you should forget the short term, and not worry about the economy or the direction of the market. Instead, buy a share of a company the way you buy a house: because you know all about it, and want to own it for a long time at that price. In fact, you should only buy what you would be happy to own in the absence of any market.


In managing your investments, the principle of conservation of energy becomes central, since to win you have to know more than the market does about some particular company you are buying stock in. If, on the contrary, you try to know about practically everything, you will probably know less than the market about any particular company. So one of the decisions you need to make is what to focus on. Most investors give this subject little thought. And yet the decision to concentrate on growth, value, emerging markets, exotica, distressed securities, high technology, small or regional companies, real estate, high-grade bonds, low-grade bonds, or whatever is central to your success. Think of yourself as a company: A company almost never succeeds in manufacturing a variety of unrelated products, all the way from building materials to chewing gum. Rather, it eventually identifies an area of strength, and seeks to succeed in that market and build out from there.

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Table of Contents

1 The Craft
The Craft of the Specific 3
Growth Investing: A Field of Acorns 8
Value Investing: The Pawnshop 19
Emerging Markets 25
Reverse Engineering 30
Advice and Advisors 35
How to Buy a Stock: Cross the River, Groping for the Stones 43
When to Sell, or How to Boil a Frog 54
The Tao Theory: Mastering Your Temperament 57
2 The Nature of Markets
The Market Cycle and Its Choruses 65
The Wall Street Waltz 77
Winning Strategies: Change As the Times Change 83
Losing Strategies: Beware Simple Answers 87
3 Alternatives
When to Buy "Hard" Assets 95
Investing in Land 96
Collecting Art 101
Gold and Precious Stones 108
One Way to Get Rich 110
4 Planning Your Finances
How Much Can I Live On? 117
Insurance: A Gambling Game Where the Odds Favor the House 123
Consider a Prenuptial Agreement 125
Investing for Retirement: Start Early! 129
Family Capital 137
The Executor's Job 140
A Financial Inventory 146
How to Use a Safe-Deposit Box 150
Two Good Uses for Revocable Trusts 154
The Last Great Tax Shelter 157
App: Great Growth Stocks 163
App: The Man Who Never Lost 167
App: Becoming an Investment Professional 170
App: An Investment Credo 174
App: Bad Deals and Pitfalls 177
App: Train's Laws 184
App: The Shortest Possible Course on Reading a Financial Statement 187
Investment Terms: A Wall Street Dictionary 191
Index 207
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